The dollar, chart patterns, and seasonal strength are all pointing towards a golden opportunity in precious metal mining stocks. The January correction flushed out weak hands and reset momentum and sentiment indicators. The January correction, February rally, and weak March correction have set up a variety of bullish patterns on the charts. There are a few more road signs we need to pass to get back on this golden highway to higher highs, but the GPS navigation unit in the car is flashing: in 600 feet turn right onto, “Golden Highway”.
From late July to November we were on the golden highway, driving to higher highs from $1160 to $1426. Since gold first reached $1426 in November 2010, we got off to fill up on some dollar rally and we haven’t quite found the onramp until now.
To me, the charts on gold and many miners look good. I think you can take your pick between two bullish setups on gold itself: 1) Possible inverse head & shoulder continuation pattern and 2) a cup and handle pattern (both shown below). Many of the miners share in one of those two patterns; or they have already broken out of long consolidation patterns this year like Allied Nevada Gold Corp (ANV), IAMGold Corporation (IAG), New Gold Inc (NGD), Endeavour Silver (EXK), and Coeur D’Alene Mines (CDE). Many have yet to break their 5-month consolidations, but I think more and more miners will be joining the group I listed above.
I said “possible” H&S pattern in gold because in technical analysis, you don’t call it complete until the price closes above (in this case) the neckline by 1-3%. The breakout is further confirmed if it is retested and holds. The intermediate-term upside target for gold, based on the completion of this pattern, is 45.
The primary force driving the price in gold is the U.S. dollar. From January 10th, 2011 until now, it has been in decline. Looking at the structure of the decline since January, the downward legs have been tracing out 5-wave patterns that indicate the primary direction the dollar wants to move is down. The rally in February traced out a 3-wave pattern that is typical of counter trend moves. It appears we have finished another 5-wave downtrend from February within the leg down that started in January. That leg, itself, is trending well within the long-term downtrend in the dollar that started on June 9th, 2010. Everything trends in short, intermediate, long-term, and secular cycles. All four of those have lined up this month to the downside. A very powerful combination!
Intermediate-Term Trend
Long-term Trend
And the Secular Trend
Despite the break in the 5-year triangle in the U.S. dollar, it would be prudent to double check the current trend against horizontal supports near the 2010 low (74.17) and the 2008 low (near 71.30). We are currently breaking below the October low near 75.63. Additionally, a retest of the breakdown in the triangle would help to further confirm the break, but it isn’t necessary for us to continue to trend down. So watch for support to break near those two lows and look for resistance to any rally near the triangle break near 76.70. The main theme here, however, is that the dollar is trending down on all cycles and may have finally broken out of a 7-year consolidation between 74 and 90. IF the dollar trades back into the triangle and breaks above the intermediate trend down (black channel below), it is likely the cycle is shifted to an alternative count for one last rally (see below).
You may be asking the question: why hasn’t the dollar collapsed by now? To answer that, I think we can again turn to the charts. Simply put, we’ve been rubber banding around multi-decade support in the U.S. dollar index near 80. Like a coil, the longer we spend winding up that coil the more pressure is built up for when it eventually springs. A break out of the current dollar consolidation should be steep in either direction.
Source: Bloomberg
Last, but not least, I’d like to talk about two factors that up until now have been the gas propelling us along the precious metal’s golden highway to higher highs: US dollar weakness and seasonal strength. These two factors could become traffic jams in the intermediate term. The first is the seasonality of mining stocks and precious metals. Typically, we have seen some form of correction between April and August. It doesn’t happen all the time, but statistically, that’s the average for the past nine or so years.
Source: Bloomberg
The other factor that precious metals investors should be aware of is the end of Quantitative Easing 2.0 which is set to fall in June. Will they extend it? Or will Quantitative easing 3.0 be on its heels? I don’t think so. The Federal Reserve Bank will likely pause to review the after effects of QE 2 before considering a QE 3, as needed. QE 3 is a possibility due to a Fed Funds rate near 0. Quantitative easing is the major tool of choice available to them to stimulate the economy; however, they have mentioned before that they have the means to use “unconventional methods” to support the market. In disagreement with Jim Cramer, I don’t think the academics are entirely devoid of market understanding (as they are keeping their intervention on the Yen secret to confuse currency traders) and probably know it wouldn’t be a good idea to start another QE program off the heels of another until commodity prices come down. The time period for the end of QE coincides roughly to a seasonally weak period for precious metals.
As stated above, there are now two themes that could cause weakness in precious metals. That said, we are near the lows for the U.S. dollar, a price range that has supported it for the last three years. If that were to break, we could see precious metals rise at an accelerated pace (parabolic or greater than 2 standard deviations from popular short-term moving averages). Such an event would cause euphoria and ultra bullish sentiment for precious metals. The charts still show multiple possibilities. We haven’t broken out yet in gold, nor have we in the Market Vector Gold Miners ETF (GDX). While I’m rooting with our readers for a rally in my precious metal, energy, and food commodity investments, we should all have a keen eye on the realities that commodities are volatile and can whip gains into terrible losses in a week’s notice. Good luck and keep your eyes on the charts over the next week or so. We are having a key moment in the intermediate trend in the dollar and in precious metals that may determine a serious turn of events for the secular trend (GDX near $55 for 3 years and a dollar near 80 for 7 years!!!). Hopefully we don’t have to wait for the next exit to find the golden highway again. It could very well be our next right turn.
